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Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities

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  • Eijffinger, S.C.W.
  • Goderis, B.V.G.

    (Tilburg University, Center for Economic Research)

Abstract

This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis.To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment.The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output.A higher exposure to exchange rate changes also increases the need for output loss compensation.However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation.As a result, its effects on the probability of crisis is ambiguous.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-113.

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Date of creation: 2005
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Handle: RePEc:dgr:kubcen:2005113

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Web page: http://center.uvt.nl

Related research

Keywords: currency; financial crisis; monetary policy; foreign debt; balance sheets; short term debt;

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  1. Sweder van Wijnbergen, 1987. "Fiscal Deficits, Exchange Rate Crises and Inflation," NBER Working Papers 2130, National Bureau of Economic Research, Inc.
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  1. Of Economic Growth and Currency Crises ...
    by CV in alpha.sources.cv on 2007-10-08 19:20:37
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Cited by:
  1. Eijffinger, Sylvester C W & Goderis, Benedikt, 2007. "The Effect of Monetary Policy on Exchange Rates During Currency Crises: The Role of Debt, Institutions and Financial Openness," CEPR Discussion Papers 6217, C.E.P.R. Discussion Papers.

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